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I was looking at stock prices and dividends the other day, and wondered this. Large companies whose shares I was looking at had dividends of the order of ~1-2%, such as 0.65%, or 1.2% or some such. My savings account provides me with an annual return of 4% as interest.

Why would one want to purchase stocks of such companies over the long term? Wouldn't they be losing money, even though technically they are getting paid every year? I ask this as some people said they consider dividends as a secondary income. One guy on Quora said he's getting GBP 1M annually from an investment portfolio of GBP 20M. How he was doing that, I have no idea.

Why not just invest in options instead for higher potential profits? I ask this because the portal I use for trading does not have negative option prices.

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    If you have no idea how someone is getting 5% return, then you are asking the right question... But it seems a very naive and completely unresearched question. No vote from me, but the downvoter has legitimate reasons for down voting. – Peter K. Sep 12 '16 at 10:41
  • @PeterK. Noted, but I just want to know what I'm missing here. Do you have any suggestions on improving the question? – cst1992 Sep 12 '16 at 10:45
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    @cst1992 I think the tone assumes that your theory is correct. Combined with the fact that it appears not to have been researched, is a little offputting. – Grade 'Eh' Bacon Sep 12 '16 at 13:20
  • Downvoted because your phrasing clutters up a simple question (how do I gain by holding stock?) with an implied negative comparison to a savings account. On top of which, you don't seem to understand the risks of the savings account either. (Bank cuts interest rate, bank declares bankruptcy, inflation higher than your interest rate, etc.) And where does options even fit in to the first 2 paragraphs? It comes out of nowhere to add a final throw away sentence. – davmp Sep 13 '16 at 22:39
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    Where exactly are you getting 4% on a plain vanilla savings account? – quid Sep 26 '16 at 16:44
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Stock prices aren't constant; they rise and fall.

The overall return on a share is the combination of the dividends paid plus the change in value of the share. Some companies pay no dividend at all yet investors still buy their shares because they believe the share price will rise.

People invest in stocks because they believe that the overall return will exceed what they can get from cash in the bank.

As to options they do offer higher potential profits but they also offer higher potential losses. Different investors have different appetites for risk. Many are comfortable with the risk of mainstream stock investing but not with that of options trading.

  • Mainstream investing(buying or shorting) is much slower in the short term than options though. – cst1992 Sep 12 '16 at 10:40
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    Yep, options trading can bankrupt you much quicker ;) Plus a lot of investors are in it for the long haul and aren't interested in short-term trading. Different goals, different approaches. – Nigel Harper Sep 12 '16 at 10:55
  • I supervised the final year project of a student who did options trading. One meeting we had he came in looking shattered. He had been doing relatively well on the trading, but this time his bet came in so far out of the money that he was looking at a $3M loss --- money he didn't have. Thankfully, the trade ended fine for him, but he stopped trading after that experience. – Peter K. Sep 12 '16 at 10:59
  • @PeterK. your student was doing research on his own dime, instead of a mock account? Or was the project unrelated to finance/economics? – Mindwin Sep 26 '16 at 13:37
  • @Mindwin The trading was on his own dime, unrelated to the project I was advising him on. – Peter K. Sep 26 '16 at 16:58
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Large companies whose shares I was looking at had dividends of the order of ~1-2%, such as 0.65%, or 1.2% or some such. My savings account provides me with an annual return of 4% as interest.

Firstly inflation, interest increases the numeric value of your bank balance but inflation reduces what that means in real terms. From a quick google it looks like inflation in india is currently arround 6% so your savings account is losing 2% in real terms.

On the other hand you would expect a stable company to maintain a similar value in real terms. So the dividend can be seen as real terms income.

Secondly investors generally hope that their companies will not merely be stable but grow in value over time. Whether that hope is rational is another question.

Why not just invest in options instead for higher potential profits?

It's possible to make a lot of money this way. It's also possible to lose a lot of money this way. If your knowlage of money is so poor you don't even understand why people buy stocks there is no way you should be going near the more complicated financial products.

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    If your knowledge of money is so poor you don't even understand why people buy stocks there is no way you should be going near the more complicated financial products. Wow, that's harsh. Everyone's a learner, right? It's not like all financially literate people are Warren Buffett. – cst1992 Sep 12 '16 at 14:30
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    @cst1992 Harsh, but because the risks are so high, probably called for. If you invest $1000 in stock, the absolute worst case scenario is that you lose the $1000. If you invest $1000 in options, there's no theoretical limit to how much you can lose – if everything goes wrong, you lose the $1000 and suddenly you owe someone $1,000,000. – Moyli Sep 12 '16 at 15:41
  • @Moyli How? On the portal I use, option prices don't go negative. They could go to a single cent at lowest(nonzero), and zero if no one's trading, but never negative. – cst1992 Sep 12 '16 at 15:46
  • @cst1992 The portal probably includes or you are only shown products where losses are capped. Most of the time the profits are capped in those products as well. – Moyli Sep 12 '16 at 15:53
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    Prices of an option don't have to go negative themselves for you to lose more than your initial investment. Consider having sold a put on stock XYZ at strike $100. If the price of XYZ drops to $50 and you get assigned, then suddenly you need to pay someone $50 more than the stock is worth AND you have to do this on 100 shares of XYZ for each option in question. Admittedly, if you only buy options, then this wouldn't apply -- because you could just never exercise. But the set of options strategies for just buying are fairly limited, so you're likely to sell at some point. – davmp Sep 13 '16 at 22:33

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